United Liberty

On March 1st, the so-called sequester which is a series of automatic spending “cuts” that were agreed to in 2011 are supposed to take effect. The “cuts” are supposed to be around $1.2 trillion over 10 years spread equally among defense and non-defense spending. Democrats are complaining how women, children, and old people will be (insert one or more of the following here) starved, made homeless, and/or impoverished by the “cuts” in social welfare programs. Republican defense hawks are claiming that sequester will destroy the US military. Both groups also claim the sequester will put the economy back into recession and/or maybe even a depression. Indeed, both groups say that the sequester should be avoided at all costs and that we should “raise revenues” which is Washington speak for raising taxes to cover the amount that was supposed to be “cut”. However, if we are ever going to get our nation’s fiscal house in order, we have to allow the sequester to take effect.

Why I Hate The Sequester

Although I do believe that the sequester must be allowed to take effect, I don’t like it. For starters, $1.2 trillion in “cuts” (which are not actual budget cuts but instead are merely reductions in the rate of spending growth) is a very small amount when you look at how grave the nation’s financial condition is.

Secondly, the sequester does nothing to address entitlement programs like Social Security and Medicare which are the two long-term drivers of future financial problems.

Third, the Democrats do have a point when they say the cuts fall disproportionately on non-defense spending. The Department of Defense is the largest single item of discretionary spending and all other agencies combined do not equal it. But the DoD is only taking 50% of the cuts.

Back during the 2008 campaign, then-candidate Barack Obama told Americans on more than one occasion that they would see a net-spending cut during his first-term in office. But nearly four years, that promise hasn’t come to fruition. In fact, the national debt has grown by more than $5 trillion as spending was increased, as is taught in the Keynesian school, to “prime the pump” of the economy. Obama once said such out of control spending was “unpatriotic.” My, how things have changed.

During an interview on The Late Show on Tuesday night, President Obama told David Letterman that the national debt really isn’t a big deal:

President Obama said that the U.S. does not have to “worry” about its $16 trillion debt in the “short term.” He also could not “remember” what the nation’s total debt figures were when he entered office.

“I don’t know remember what the number was precisely,” Obama told talk show host David Letterman during an interview.

Letterman asked him if Americans should be “scared” of the trillions of dollars it owes to other countries.

“A lot of it we owe to ourselves. Because if you invest in a treasury bill or something like that then essentially you’re loaning the government money. In fact, the majority of it is held by folks who live here, but we don’t have to worry about it short term,” Obama responded.

Early during his second term, President George W. Bush declared he would spend his accumulated political capital on reforming Social Security. Democrats immediately lambasted the president, falsely claiming that his reform ideas were “radical” and would leave the elderly penniless and laying in the streets. They claimed Bush would gamble the life savings of our parents and grandparents on the stock market, and that his Wall Street buddies would grow rich while swindling granny out of everything she owned.

Of course, the truth was nowhere close. Bush’s “Strengthening Social Security for the 21st Century” plan was actually quite timid. It made no changes, zero, in the Social Security program for those 55 and over. Under Bush’s plan, personal retirement accounts would be phased in, with annual contribution limits gradually increased to a staggering…4%…yes 4%…of workers’ payroll taxes allocated to their personal accounts, with annual contributions initially capped at $1,000 per year in 2009, rising over time by $100 annually, plus growth in average wages. In other words, a measly 4% of payroll taxes would have been invested in private accounts, with the other 96% staying in the Social Security Trust Fund.

And yet due to this “radical” plan, this blindingly fast weaning of Americans from the government teat, Democrats successfully terrified Americas seniors and Bush’s political capital was eviscerated. He would end up abandoning the effort and Republicans would crawl back into their shells, unwilling to again touch this third rail of American politics.

On the campaign trail and during the third presidential debate with Sen. John McCain (R-AZ) in 2008, then-candidate Barack Obama promised that Americans would see a “net-spending cut” during his presidency.

The claim was met with a boatload of skepticism given that Obama was proposing massive expansions in healthcare and non-defense discretionary spending; however, we all crossed our fingers that he would follow through, but we didn’t hold our breath.

The skepticism proved to be justified. Just a couple of months after coming into office, President Barack Obama told Americans that under his budget that there would be trillion dollar deficits as far as the eye can see.

He wasn’t kidding. The Congressional Budget Office released its budget report for this current fiscal year yesterday, predicting yet another trillion dollar budget deficit and unemployment hovering around 9%:

The Congressional Budget Office on Tuesday predicted the deficit will rise to $1.08 trillion in 2012.

The office also projected the jobless rate would rise to 8.9 percent by the end of 2012, and to 9.2 percent in 2013.

These are much dimmer forecasts than in CBO’s last report in August, when the office projected a $973 billion deficit. The report reflects weaker corporate tax revenue and the extension for two months of the payroll tax holiday.
[…]
If the CBO estimate is correct, it would mean that the United States recorded a deficit of more than $1 trillion for every year of Obama’s first term.

As Congress debates the extension of the payroll tax cut, a measure that the White House said would stimulate the economy and create jobs, I offered my own thoughts on alternatives that would encourage economic growth and protect Social Security.

Topping the list of unfinished business this year is the impending collision of two closely related crises: the expiration of the payroll tax cut and the acceleration of Social Security’s bankruptcy.

Last year, Congress voted for a payroll tax cut that averages roughly $1,000 for every working family in America.

As warned, it failed to stimulate economic growth and it accelerated the collapse of the Social Security system. But as promised, it threw every working family a vital lifeline in tough economic times.

We need to meet three conflicting objectives: we need to continue the payroll tax cut; we need to stimulate real economic growth and we need to avoid doing further damage to the Social Security system.

But first, we need to understand that not all tax cuts stimulate lasting economic growth. Cutting marginal tax rates does so because this changes the incentives that individuals respond to. Cutting infra-marginal tax rates - such as the payroll tax - does not.

It’s been an interesting last couple of weeks in the race for the Republican nomination for president as this race has seen the two frontrunners go after each other on economic records and other issues, including a debate over Social Security. While Romney has cast himself as a conservative, he has been running to the left of Perry on entitlements, chastizing Perry for his past comments on the issue.

As far as the rankings go, I’ve moved Herman Cain up a spot over Newt Gingrich, but he’s still below Bachmann. But I expect a shake up as soon as next week as fresh polls come out in the race.

The News

The bruhaha over Rick Perry’s comments that Social Security is a Ponzi scheme have taken a backseat to the remembrance of 9/11 and the Redskins’ first win in about 90 years, but let’s fan the flames a bit. Thanks to the erudite Don Boudreaux over at Cafe Hayek, it has come to my attention that a highly visible economist at one of the nation’s largest papers agrees with Gov. Perry’s assertion:

Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

And yes, you’ve probably guessed it: it’s Paul Krugman. And yes, you’ve probably guessed it, but the above emphasis is mine.

The essay was written in the December 1996/January 1997 edition of the Boston Review, as a response to Richard Freeman’s suggestions on fixing inequality. I profess to not having read Freeman’s work entirely, though mostly it was more of the same “we need to take the wealth from the top 20% and give it to the bottom 20%” nonsense.

GOP hopefuls will square off tonight for the second time in a week, this time at a debate sponsored by CNN and the Tea Party Express in Tampa, Florida. We’re likely to see fireworks similar to what we saw on Thursday. Rick Perry, who is considered to be the frontrunner, will no doubt be a target again by Mitt Romney and Ron Paul. It wouldn’t be surprising to see Michele Bachmann join the parade. President Barack Obama is sure to take criticism, and rightly so, over his latest stimulus gimmick.

Before we dive into the power rankings, here is a look at the latest polling in the race.

Rick Perry (even): Perry has become a punching bag for other candidates near the front of the race. Romney is knocking him over Social Security, Paul is taking him to task for being a former Democrat that backed Al Gore and supported HillaryCare and a pro-Bachmann group plans to run ads against him over immigration. Polls indicate that he is still the frontrunner, but he needs to improve in debates and hope at the ramp up attacks don’t stick.

It is human nature to seek those things which are most rare and beautiful, and therefore the most prized. In the physical world, few things elicit visions of such stark elegance and grandeur than Carrara marble. Marble is highly sought after and desired in our most beautiful edifices. Expensive and often difficult to work with, its very temperamental nature makes it all the more desirable, the elemental equivalent of a beautiful, tempestuous woman that will not be tamed.

Marble comes in a myriad of types and colors, but Carrara marble, known for its pure, milky white character, is prized above all other marble by the world’s greatest sculptors. Centuries ago, in the “Golden Age” of Tuscan sculpture, it was considered the highest honor for a sculptor to be commissioned by a wealthy benefactor to create a statue from a block of Carrara marble.

It was also an endeavor that came with great pressure for the sculptor. Before the chisel was ever applied to the marble, the sculptor must first study the block in exquisite detail, memorizing its characteristics, noting the direction of the grain and any tiny flaws in the stone. He had to map out every strike with precision, completing the sculpture in his head before ever touching the stone. It was critical that he understand the flow of the marble’s grain. If not, a single strike with hammer and chisel against the grain could crack it. To strike with excessive force could cause the crystalline structure of the stone to be crushed, which in turn led to sub-surface holes that could ruin the entire piece.

With the recent action taken to downgrade our credit rating by Standard & Poor’s (S&P) and the significant decline in stocks over the last few days, I fired over a few questions to Joe Magyer, a financial advisor at The Motley Fool, UGA grad and friend. Hopefully, this will help you make at least some sense of what is going on right now. Also, make sure to check out Joe’s recent post, The 60-Second Guide to Recession-Proof Investing.

Q: What do you make of the downgrading in the United States’ credit rating?

JM: It is an embarrassment for our country, a blow to consumer confidence, and might ultimately cost us dearly later on. I can’t say I’m terribly surprised that Standard & Poor’s chose to downgrade the U.S, though. They drew a line in the sand when they said they’d want to see $4 trillion in cuts and our leaders didn’t deliver. Not that I give much credence to ratings agencies’ opinions to begin with. Collectively, they’re reactionary and fairly lemming-like.

Q: It doesn’t seem like anyone was happy with the deal worked out between the White House and Congress, but it only seemed like a matter of time before a credit agency like S&P took this step given that the long-term issues with the budget were not addressed.

JM: This is the first of several awkward debt dances we’ll be doing in the years ahead. The latest deal doesn’t come close to solving our longer-term issues. Namely, cutting entitlements. The sooner our elected officials can rip the band-aid off the better, but I expect we’ll keep seeing more political gamesmanship and less progress.